Understanding asset values is the name of the game for early-stage resource plays—that's how investors in the Bakken made huge returns. But with the first round of shale plays largely maturing, where are the next big opportunities for junior explorers? In many cases, abroad, says James West, publisher of The Midas Letter. In this interview with The Energy Report, West rolls out the map and shows us where juniors are headed. He also names some companies who are thriving on North American soil. If boots-on-the-ground prospecting puts a glint in your eye, read on.
The Energy Report: What are the key considerations investors should make in evaluating geographical location and political risk in junior exploration and development plays?
James West: Outside of North America, there are a few obvious no-go zones—Russia, China and parts of war-torn Africa. Then again, we did see a great junior success in Kenya with Africa Oil Corp. (AOI:TSX.V), so certain regions in Africa are less risky. Presently in Kenya, I'm watching the progress of Africa Hydrocarbons Inc. (NFK:TSX.V) with interest as the company seeks to emulate Africa Oil's success. Africa Hydrocarbons commenced drilling on its 47.5%-owned Bouhajla Block, located onshore in Tunisia within the productive Pelagian Basin.
Australia carries little or no political risk of expropriation. Terra Nova Energy Ltd. (TGC:TSX.V; TNVMF:OTCPK; GLTN:FSE) is drilling in the Cooper Basin in Australia. Initial production wells that Chevron Corp. (CVX:NYSE) drilled in that basin are pumping 2,000 barrels per day (Mbbl/d). And investors will do well to concentrate on Canada and the United States—there is just so much profitable activity going on in the shale space and in legacy wells and oil field redevelopment.
It's actually Beach Energy Ltd. (BPT:ASX) that made the initial discoveries in the Cooper Basin, and is now flowing in excess of 10,000 barrels oil equivalent per day (boe/d). Chevron has farmed into two exploration permits owned by Beach Energy, but is a minority holder and non-operator.
TER: Are there any places where the political risk outweighs any potential payoffs?
JW: If a government is already inclined toward resource nationalization, then potential success does not really matter. A nationalized firm is going to lose it all, or see its assets tied up in international courts for years.
TER: Which countries in South America are safe?
JW: I am not too keen to invest in Argentina, even though there are Canada-listed TSX juniors producing oil there and at this point it is safe. I am nervous about the long-term political security of Argentina. But in Colombia, on the other hand, the trend is toward stability. Several companies doing business in Colombia are producing and exporting oil without incident. PetroAmerica Oil Corp. (PTA:TSX) is having great success. And Peru, Chile and, to a lesser extent, Brazil are very safe. Ecuador and Venezuela are at the opposite end of that spectrum. Those two countries are no-go zones.
TER: What type of challenge does a junior explorer need to overcome in a politically safe but geographically extreme region like the Yukon?
JW: Typically, the challenge for juniors in the far north is freezing temperatures, especially north of the Arctic Circle. But in the southwestern Yukon where, for example, companies like EFLO Energy Inc. (EFLO:OTCQB) operate, the weather is not so frigid. The challenge there is the snow pack. There are places where you cannot go with heavy equipment until the land is frozen over. That is the case in other Canadian regions, too. But those types of challenges to oil and gas exploration are not insurmountable. The oil sands in northwestern Alberta and northeastern British Columbia are a testament to that. Regardless of the challenges posed by extreme weather, the oils sands support one of the largest oil and gas production infrastructures to be found anywhere.
TER: Do drillers in difficult geographical locations tend to rely on service companies more heavily?
JW: Generally, the service companies are deployed at the same ratio. Local service companies have expertise relevant to the local weather patterns and the associated terrestrial challenges. So companies gravitate toward local firms for early-stage geophysics, but then when it comes to drilling deep, expensive wells, they gravitate toward the multinationals—companies like Baker Hughes Inc. (BHI:NYSE), Schlumberger Ltd. (SLB:NYSE), etc.
TER: You mentioned EFLO Energy. Could you give us a profile on that name?
JW: EFLO Energy has an interest in the Kotaneelee gas field in the Yukon, which is where Apache Corp. (APA:NYSE) recently announced a discovery hole with astounding flow rates. The potential size of the reservoir is over 30 billion cubic feet. It is proximal to where Apache is working on a very large land position with gas processing infrastructure. EFLO is well situated to take advantage of working one of the largest, but as yet undeveloped, gas fields in the world: the Kotaneelee.
TER: What is the situation with the share price of EFLO Energy?
JW: EFLO has held up well—between $1.40 and $2.60 during the last year. It's at $1.50 right now, but that is a reflection of the fact that it has not been drilling much of late. The company is currently focused on building its executive team. Once it starts to drill and develop the oil and gas field, its share price will most likely improve. If it makes a decent-size discovery, it will be a very attractive takeout candidate for a foreign national oil company. China's national oil companies are showing great interest in Canadian companies with large gas reserves.
TER: What about the Peace River Arch region? How does that differ from the Yukon in terms of geographical challenges?